The True Cost of Cashing out Your 401(k) – And Some Better Options

A leaky roof, a damaged septic system, a child getting ready to go to college—if you are facing any of these expensive propositions, you may be thinking about taking money out of your 401(k). Before you call your HR rep, check out the true cost of tapping your retirement account and these valuable alternatives.

You’ll Pay Penalties

If you are under the age of 59.5, you can withdraw money from your 401(k) for hardship distributions. However, according to Schwab.com, you will still owe taxes on your withdrawal. If you withdraw $10,000 and you are in the 20 percent tax bracket, you will have to pay $2,000 in taxes plus a 10 percent early withdrawal penalty of $1,000. That turns your $10,000 into $7,000.

And Damage Your Nest Egg

Piggy bank 401K and dollarThe true cost of your 401(k) withdrawal isn’t accurately expressed by this $3,000 loss, however. The true loss caused by the withdrawal happens much later.

Using the above example, if you are 40 years old and you withdraw that $10,000 from your 401(k), you will have $7,000 to spend. However, if you had left that money in your 401(k) account for 25 years—until you were 65 years old—you would have had $68,485, based on a projected 8 percent annual rate of return. Thus, the true cost of the $7,000 was approximately $61,485.

Visit the Wells Fargo online calculator to estimate how much you will lose through an early withdrawal.

Some Other Options

Seventy-five percent of Americans don’t have enough savings to cover their bills for six months, according to Bankrate.com. Without an emergency fund, it can be impossible to deal with the expensive and unexpected things that life can throw at you. You don’t want to hit your 401(k), nor do you want to dig deeper into debt by going to one of those fast-cash loan places that charge exorbitant amounts of interest. Instead, try one of these funding alternatives:

  • Get a home loan. Loans against your home equity are usually a more affordable alternative to tapping your 401(k). If you have home equity, you can apply for a home equity loan, a lump sum disbursement that you pay back monthly with your mortgage, or a home equity line of credit, a line of credit that works similarly to a credit card. Visit the Federal Trade Commission website for more information about these lines of credit.
  • Liquidate assets. Consider selling any stock you may hold or your unused electronics, exercise equipment or collectibles. If you receive regular payments from an annuity or structured settlement, you may be able to sell your future payments for a lump sum of cash now. Visit J.G. Wentworth’s Twitter feed for more information.
  • Get a second job. If it’s early in the year, you could get a job as a tax preparer; if it’s later, you could sign on with a retail establishment looking for holiday help. You could also start your own eBay business, babysitting or dog-walking business or lawn care business.



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